Wednesday, September 27, 2017

Things learned while running your own self-funded startup

Here's a brain dump of the things we've learned while running our business and shipping our first product (Basis).

My experience at Valve somewhat helped prepare me for doing this. Working at Valve was like a microcosm of working at your own company. You needed to find customers, interact with them, and figure out what was valuable to them. (You also needed to identify "competitors" and do your best to ignore or respond to whatever challenges they might throw your way.) Financial concerns weren't an issue, but time and your reputation at the company was. I noticed a feedback loop there: The more success you got at Valve, the easier it was to find projects to help out on. As you earned "Valve Bucks" doors got opened much easier.

Entering Valve with basically zero Valve Bucks was a big challenge. It wasn't enough to merely be a good engineer at Valve. If you were a good engineer with zero communication skills your chances at surviving and thriving when I was there were pretty low. If you acted like an asshole and didn't have many friends it didn't matter how good you were or how awesome your accomplishments were. People like this would be fired sooner or later.

Anyhow, running your own company has a number of additional challenges. There are no bi-weekly paychecks, no free lunches, no PTO, no yearly Hawaiian vacation, and no on-site lawyers. You are now in the real world, and you're leaving the high school like corporate drama behind. Everything, including staying financially solvent, is now your responsibility.

Some things we've learned:

1. This is a dramatically more mature way of working vs. full-timing. Your boss is basically the bank. Keeping your account in the green is like an optimization problem. If you fail you go under, or you wind up in the arms of potentially predatory investors.

2. You want a product ASAP. Contract work is basically linear income relative to time, while products can be exponential. Just choose a product and ship it. If it fails, try again and again, because the things you learned while working on the first product will help you immensely on your second.

3. Products can take a long time to develop and monetize. Contract work can bring in immediate income, but only a trickle. The big challenge is working on contracts to stay afloat in the short term, but also finding time to work on your product for long term success.

4. There are lots of ways to stay funded until your product takes off: You can use savings, loans from friends, investor funds, government grants, and income from short contracts. I would recommend staying away from investors as much as you can, because once you get in bed with investors you no longer totally own your company (and it can be basically taken away from you).

5. Every decision must be made extremely carefully. Bad decisions cost money.

6. The large companies move very slowly. Do not place any bets on getting paid quickly by large companies, no matter how happy they say they are with you.

So, at least with a software middleware product, I would first target small customers because they move more quickly.

7. If you have a product that a very large company really wants, they'll still do everything they can to delay purchasing it for the market price. They'll try to hire you or your partner(s) away individually, or they'll wait as long as possible to see if you encounter hard financial times and go under. They won't come and just offer to license your product or buy you out until they've exhausted all other possibilities.

8. If your product offers evaluation licenses, then be very careful with the eval time period. Some companies will purposely demand very long evals as a form of negotiation leverage.

9. A company can feign interest in licensing your product, get your lawyer bogged down negotiating terms of the license (or eval license), then pull away or suddenly change their mind at the last minute. This costs money. To avoid this, a "put up or shut up" mentality can help. Either the company accepts your eval license with little fuss, or just move on.

10. No Hard Sells: If the company you are negotiating with gets overly emotional about the terms in your eval license, then move on. Either they want the value your product offers, or they don't.

11. Research pricing: Your competitor(s) will publicly advertise low-ball prices to help lure in customers, but once you start negotiating with them the price goes up (sometimes massively). Talk to your competitor's customers and just ask them what they actually paid, and you'll be amazed at how much software middleware is actually worth in the market.

The publicly advertised price is basically just for corporate programmers, who generally don't understand the true market value of their code when properly packaged as a product. The public price is optimized so programmers won't feel bad about how underpaid they are, but it won't be too low so the coders will still perceive the product as having sufficient value.

Research the concept of "Death Prices". If the price is too low, it won't be perceived as having enough value to bother with, and low prices won't sustain your efforts. Set the price sufficiently high and let the market set the actual price. Most likely, if you're a programmer, you'll set the price too low because you've been brainwashed into thinking that your software doesn't have much value.

Large companies will pay high prices to be first to use your software, if it's perceived to be groundbreaking or awesome enough.

12. Find a good lawyer. Get your eval and software license figured out early. This is going to cost money, so save up. A lawyer with patent and software license experience is a huge bonus.

13. Interactions with real customers is priceless. Ask them what they want. For us, we were amazed at all the different ways the open source predecessor of Basis (crunch) was utilized. We pivoted our strategy to RDO encoders based off customer feedback. Our long term roadmap is based off what customers are actually doing with our software right now.

14. Open source is forever: Be extremely careful releasing open source software. "Thou shall not release too much functionality or features as open source". Open sourcing your work is both a blessing and a curse, and can be actually dangerous from a patent troll perspective.

Open source is great, because potential customers will get a chance to try out your work without spending a dime or ever talking to you. This boosts your credibility. On the flip side, if you give away too much, you are basically competing against yourself when you attempt to monetize your work as a product.

Your open source release should be a demo of the product, and no more. Give things away with the goal of eventually converting the users of the free software into paying customers.

Even if you don't intend on turning the software into a product, always keep in mind ways it can be eventually monetized. Your time is worth something.

Talk to every user of your open software software that you can find. Gather intelligence about how they actually use your software.

15. Your company must appear and be stable at all costs. If one year your large and expensive GDC booth isn't present, people will notice and you'll lose business. Even the biggest game middleware vendors have had serious cashflow problems. One almost went under a few years ago until they were bailed out by a big player. Even the biggest players sometimes take contract work to stay in the green, because product income isn't reliable.

16. Align yourself well: Being associated with CoMotion Labs and Khronos was invaluable to us. At CoMotion we were exposed to tons of other startups, and this cultural immersion was valuable.

17. Perception and psychology is extremely important. If you're a programmer, you're probably going to suck at the skills needed to bring your software to market. Find a partner who compliments you well.

18. You need friends, inside and outside of companies. Make as many friends as you can.

19. Some big corps can be very nasty:

"OMG, you can't do this due to patents!"
"You'll never take off because your price is too high"
"You'll run out of money and just come work for us, so we'll just wait you out"
"You must work for us because we're going to write this software ourselves and that'll impact your market share"

Corporate programmers at these megacorps can be horrifically nasty. Also, study and become acutely aware of triangulation when dealing with large hierarchical companies.

20. Some large teams have egos and won't want to license your software because of it. The challenge to licensing software in this situation will be overcoming this institutional ego, or just waiting to see how things pan out.

21. Be aware that companies talk to each other. A larger corp can use a smaller corp to help establish prices.

22. If you're at a company with deep pockets and you want to really have influence, offer the potential of a very large license fee for key software middleware. It works.

23. Do not blindly sign NDA's. Get a checklist from your lawyer and read them very carefully. If you try to negotiate over a clause in the NDA that totally sucks and the company refuses to budge, then move on.

Also, the NDA negotiation process can be very revealing. If the company is hard to deal with at this stage, then it's safer to just move on.

24. Treat your employees well, and with respect. We don't have any employees, but we've learned a lot while talking to employees at other middleware companies.

25. Your company will be defined just as much (if not more) by the customers you turn down vs. the ones you take.

If you get a bad feeling from a potential customer, or they aren't respectful, or they treat you substantially differently vs. how they treat your partner, then it's probably best to move on. Selling software like this is actually the establishment of a relationship, and every new relationship you take on has both risks and rewards. We're careful about who we work with.

About Me

Back in the day I worked for several years at Digital Illusions on things like the first shipping deferred shaded game ("Shrek" - 2001), software renderers, and game AI. Then, after working for Microsoft at Ensemble Studios for 5 years as engine lead on Halo Wars, I took a year off to create "crunch", an advanced DXTc texture compression library. I then worked 5 years at Valve, where I contributed to Portal 2, Dota 2, CS:GO, and the Linux versions of Valve's Source1 games. I was one of the original developers on the Steam Linux team, where I worked with a (somewhat enigmatic) multi-billionare on proving that OpenGL could still hold its own vs. Direct3D. I also started the vogl (Valve's OpenGL debugger) project from scratch, which I worked on for over a year. In my spare time I work on various open source lossless and texture compression projects: crunch, LZHAM, miniz, jpeg-compressor, and picojpeg.